Case Study Decision to Install Liquid Manure System

VCE Agricultural and Applied Economics: Management and Production Economics, April 1995

by Jack Dunford

During the summer of 1994, a Northern District dairy farmer was assisted by the farm management staff in financially evaluating the decision to install a liquid manure system for his 160-cow dairy farm. This farmer was scraping manure and applying it to his 130 acres of corn land on a daily basis (weather permitting). Due to impending environmental pressures, this farmer was planning to install a $75,000 concrete manure system ($30,000 cost share available); an earthen structure was not feasible because of state restriction in the location. To further complicate the situation, the free stall area had to be moved and increased in size to accommodate the manure facility and an additional 20 cows that were needed to support the proposed investment. A total of $80,000 of borrowed funds was needed: $45,000 on the manure facility, and $35,000 for the free stall barn. Finally, 15 acres of additional cropland was required to support the 20 new cows (raised heifers).

A partial budget showing the added receipts and reduced costs versus the reduced receipts and added costs was used to evaluate this decision (see Table 1). On the positive side are the additional income from the 20 extra cows (milk sales and livestock sales), and two items of cost savings: reduced fertilizer requirements (primarily less N due to more timely manure applications) and reduced machinery costs associated with spreading dry manure. Also some labor is saved from not spreading manure daily, but this is family labor so there are no cash savings, and the extra time is devoted to milking more cows and farming more land.

On the negative side are the additional expenses of supporting more cows and land, a custom charge to pump and spread the liquid manure twice annually, and the debt service on the new investment.

In this example, the minuses outweighed the pluses, resulting in a $4,850 annual reduction in farm cash flow due to the installation of the manure system. When the debt is paid off in ten years, however, a positive cash flow ($7,600) will be possible, assuming all else remains the same.

In addition to the reduced cash flow initially, there were some alarming changes in important financial ratios: the expense ratio (cash expenses to generate income) increased from 72 percent to 75 percent; indebtedness rose from 30 percent to 35 percent and return on investment dropped from 6.7 percent to 5.7 percent. The problem here is that a significant investment is being made, but it does not, in itself, generate additional income.

This farmer decided to make the investment and hoped to offset the projected annual loss by increasing milk production through improved feeding and herd-health management programs.

This example is somewhat of a "worst case" scenario, but it points out some of the considerations that need to be made in evaluating a large capital investment of this type.

Table 1. Partial Budget for evaluating the addition of a liquid manure system.

(1) Added Receipts
-Milk Sales (20 additional cows)	$38,588
-Livestock Sales (culls & bull calves)	3,083
Total Added Receipts	$41,671
(2) Reduced Costs
-Reduced Fertilizer (more efficient use)	2,000
-Reduced Machinery Operating Costs	1,750
(manure spreading)
Total Reduced Costs	3,750
(A) ADDED RECEIPTS & REDUCED COSTS	$45,421
(3) Reduced Receipts (None)
(4) Added Costs	&nsp;
-Additional Cash Expense (20 cows & 15 acres)	29,472
-Contract Manure Pumping/Spreading	8,333
-20 Bred Heifers (no charge - from herd)	0
-Debt Service on New Investment (9%, 10 yr.)	12,466
Total Added Costs	$50,271
(B) REDUCED RECEIPTS + ADDED COSTS	$50,271
NET DIFFERENCE DUE TO CHANGE (B-A)	($4,850)

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